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Dow performance should be taken with a 'grain of salt' post-stock splits: Strategist

Brian Nick, Nuveen Chief Investment Strategist joins the On the Move panel to discuss the changes in the Dow and the Apple and Tesla stock splits.

Video Transcript

- All right, now we want to talk about what's going on with these markets. And to help us understand the stock splits which took place after the close on Friday and then went into effect this morning, we invite into the stream Brian Nick. He's Nuveen's chief investment strategist joining us from New York, New York. So let's talk about this.

I mean, when you get a-- for instance, Tesla was $2,000 if you were trading on Friday. Today you can get it for somewhere between $400 and $500 a share. Should I consider that a bargain if I'm an investor, and how long do I have to wait for the next split?

BRIAN NICK: No, because when the stock splits, not only are you getting it for a quarter or a third or a tenth of the price, you're also getting that fraction of the earnings as well, so it's-- it's messing with the Dow Jones Industrial Average level today, so we should probably take whatever the Dow does today with a bit of a grain of salt.

But these companies have the same outlook for shareholders per share that they've always had, so think about, you know, stock splits that way, I think, doesn't change your outlook on the individual companies or on the overall opportunity in buying the Dow, buying the S&P.

- Hey, Brian, Rick Newman here. Is the Dow now going to be a little less reflective of the tech economy since Apple is splitting? Salesforce is a new addition that is in the tech space, but a couple others are really not in the tech space. So will it diverge from-- let's say, from the NASDAQ more than usual?

BRIAN NICK: Yes. It will also diverge from the S&P 500, which has by far the largest share in technology of any sector. And the Dow is not representative of the US equity market. You've seen that, not just in 2020, but year after year, the performance, when technology is the leading sector, which it has been far more often than not, the Dow underperforms the S&P 500.

So, you know, with a relatively small number of companies and sort of the arcane weighting system that goes by share price when things like splits happen or new entrants come in, old companies move out, that's going to tend to mess with that index more than for a better diversified index like the S&P 500, which is why we look at the S&P as our benchmark.

- So, Brian, we're looking at something then where we saw Apple go from the heaviest weighted, or rather the most influential, now dropping down. I guess, overall for the Dow, what does this mean, you know, for someone who wants to invest in specifically a fund that favors the Dow?

BRIAN NICK: Well, most of the investment funds are not going to benchmark to the Dow. But if you're investing in the Dow, you're getting a less accurate picture of the overall equity market. You're not getting as many technology companies. You're not going to be as high a weight in some of the growthier parts of the health-care sector. Numbers three, four, five, and six in the S&P 500 by weight are not in the Dow. That includes Google, Amazon, Facebook.

So when you think about what's really been driving the market-- that's not necessarily the entire economy, although this year the two have gone more hand in hand as we've gone kind of to the online purchases and more of an online economy. You're not getting a representative sample of what the largest firms are, the money that they're earning for their shareholders, or the growth that they represent in terms of the potential over time.

- Hey, Brian, you mentioned that you use the S&P as your benchmark. I'm curious though. You also talk about the differences that are going on in different sectors of the economy with obviously leisure, hospitality taking a huge hit. We're going to get the job numbers on Friday, and is this going to skew the S&P 500? Or going forward, is this going to skew in a way that would drive you to avoid some of these down stocks today but in the long term may recover?

BRIAN NICK: Yeah, the jobs report we think is going to be OK that reflects the month of August. I think a lot of the pullback that you could see in consumer spending-- certainly we're going to see a pullback in income for August because of the lack of renewed fiscal stimulus. That may only start to translate into hiring decisions in September.

But without a question, you've seen hiring slowed down. You've seen layoffs continue to the tune of about a million a week. There are people joining the labor force, but there are people leaving the labor force as well. What that means for the larger company is you're seeing a lot of downsizing companies trying to get leaner and meaner, knowing that the markets are paying attention to the bottom line which includes not only revenues but lower costs.

And this is typical of what you see coming out of a recession. The economy bottoms. GDP bottom starts to climb. But the labor force tends to bottom afterwards and only recovers a couple of months or even quarters afterwards. And I think that's what you're seeing. It's different than the initial spring months where we had small businesses that are not publicly listed laying off workers because they couldn't physically open.

I think it's a different circumstance that we saw in the spring. A lot of those workers, though not all of them, have come back. What you're going to see for the larger companies is I think a desire to increase average worker productivity, and then we're in the closing months of the year.

RICK NEWMAN: Hey, Brian, one more on the Dow. It is still formally known as the Dow Jones Industrial Average. That actually seems a little bit outdated. If you have a better-- a suggestion for a better name, I'd love to hear it. But absent that, do you know the committee at S&P Dow Jones Indices that determines the composition of the Dow, are they bound by their own-- by their own rules to in terms of what they can add or take out of the Dow? Or do they have broad discretion to change it any way they feel like?

BRIAN NICK: You know, I don't know if they're bound by their own rules in terms of the rules that are set in place. To me, the one that makes it the most questionable as a benchmark for the overall market is that the companies are weighted by their share price. So you see, a split, or just the inclusion of a new company that happens to have a much higher share price, can really change how the weights are maintained.

The thing that has-- one of the things that's really given the S&P 500 the most momentum and by far the best performance of these indexes in the last couple of years has been its weighted more towards companies with larger market caps. And those companies have continued to grow the most. So when you have the higher-growth companies in the larger and the sort of a top five or 10 names in the index, it tends to result in the index continuing to perform well.

And this hasn't just happened relative to the Dow. Relative to a lot of active managers who employ more of an equal-weight strategy or have a smaller number of companies that they're looking at in terms of their portfolio size, the S&P has managed to outperform a lot of those as well. Because unless you are continuing to invest at high weights in very large companies, you had a hard time beating the S&P 500.